During 2023, investors were concerned about the sustainability of a stock-market surge primarily attributable to a small number of megacap technology stocks. These concerns have persisted as the new year has seen the S&P 500 return to record levels.
“With the customary assortment of chosen megacap stocks leading early 2024 performance, concerns about concentration risk have once again garnered significant attention, especially with regard to the potential impact on stock-market performance should these trends reverse in the forthcoming months,” remarked Brian Belski, chief investment strategist at BMO Capital Markets, in a communication
This is a topic that arises frequently in client discussions and seems to be the primary concern for investors
Fortunately, Belski suggests that investors might be overestimating the potential risk posed by a reversal in megacap stocks to the bullish market.
Instead, BMO’s analysis indicates that the S&P 500
SPX
has historically showcased robust performance following peaks in the relative performance of the 10 largest stocks. Belski highlighted the data below, demonstrating that the S&P 500 has delivered an average return of 14.3% in the year subsequent to previous relative performance peaks since 1990
| S&P 500 subsequent 1-year performance after peak in Y/Y relative performance of 10 largest S&P 500 stocks | |
| Year | Performance |
| 1992 | +12.4% |
| 1998 | +38.7% |
| 2001 | -22.6% |
| 2009 | +22.2% |
| 2013 | +17.9% |
| 2019 | +2.2% |
| 2021 | +29.2% |
| Average | +14.3% |
| Source: BMO Capital Markets, FactSet | |
The sole instance of a loss in the index occurred in 2001 subsequent to the burst of the technology bubble, a period which Belski has contended is not analogous despite recent discussions suggesting otherwise
The so-called Magnificent Seven stocks — Apple Inc.
AAPL,
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In 2024, the leadership is even more concentrated, with Microsoft, Meta, Amazon and Nvidia doing most of the heavy lifting, noted Adam Turnquist, chief technical strategist at LPL Financial, in a Tuesday note (see chart below)
LPL Financial
It was conceded by Belski that the substantial impact of the largest stocks on market performance due to their substantial weight in the index is challenging to dispute, particularly if their performance begins to wane, which is the primary concern for investors.
Belski indicated that investors should bear in mind that the S&P 500 typically experiences a technical correction at some point during the second year of a bull market. BMO maintains that the bull market began after the S&P 500’s bear-market low in October 2021.
Thus, if high-performing megacap stocks start to struggle, leading to broader market weakness, it will not be sufficient on its own to counteract the bull-market perspective, as per Belski.
As the S&P 500 has historically seen an average of around a 10% maximum downturn in the second year of bull markets, investors are advised by Belski to “maintain an active and disciplined investment approach rather than being passive or reactive to short-term performance trends.”
The S&P 500 concluded at a record level on Wednesday, ending just below the 5,000 mark. The Dow Jones Industrial Average
DJIA
achieved its 10th record close of 2024.